I. PURPOSE AND BACKGROUND

.01 This notice modifies Notice 2010-59, 2010-39 I.R.B. 396.
Notice 2010-59 provides guidance on § 9003 of the Patient
Protection and Affordable Care Act, Pub. L. No. 111-148, which added
section 106(f) to the Internal Revenue Code. Section 106(f) revises
the definition of medical expenses for employer-provided accident
and health plans, (including health flexible spending arrangements
(health FSAs) and health reimbursement arrangements (HRAs)) and for
Health Savings Accounts (HSAs) and Archer Medical Savings Accounts
(Archer MSAs). The notice explains that, after December 31, 2010,
expenses incurred for a medicine or a drug shall be treated as a reimbursement
for a medical expense only if such medicine or drug is a prescribed
drug (determined without regard to whether such drug is available
without a prescription) or is insulin. Notice 2010-59 also provides
that, except with respect to “90 percent pharmacies,”
health FSA and HRA debit cards may not be used to purchase over-the-counter
medicines or drugs after January 15, 2011.

II. MODIFICATIONS TO NOTICE 2010-59

After January 15, 2011, health FSA and HRA debit cards may continue
to be used to purchase over-the-counter medicines or drugs at drug
stores and pharmacies, at non-health care merchants that have pharmacies
and at mail order and web-based vendors that sell prescription drugs,
if: (1) prior to purchase, (i) the prescription (as defined in Notice
2010-59) for the over-the-counter medicine or drug is presented (in
any format) to the pharmacist; (ii) the over-the-counter medicine
or drug is dispensed by the pharmacist in accordance with applicable
law and regulations pertaining to the practice of pharmacy; and (iii)
an Rx number is assigned; (2) the pharmacy or other vendor retains
a record of the Rx number, the name of the purchaser (or the name
of the person for whom the prescription applies), and the date and
amount of the purchase in a manner that meets IRS recordkeeping requirements[1]; (3) all of these records are available to the employer
or its agent upon request; (4) the debit card system will not accept
a charge for an over-the-counter medicine or drug unless an Rx number
has been assigned; and (5) the requirements of the guidance referred
to in paragraph I.02 of this notice are satisfied. If these requirements
are met, the debit card transaction will be considered fully substantiated
at the time and point-of-sale.

After January 15, 2011, health FSA and HRA debit cards may also
continue to be used to purchase over-the-counter medicines or drugs
from vendors (other than drug stores and pharmacies, non-health care
merchants that have pharmacies, and mail order and web-based vendors
that sell prescription drugs) having health care related Merchant
Codes, as described in Rev. Rul. 2003-43, 2003-1 C.B. 935, if all
requirements in the preceding paragraph are satisfied, other than
the requirements in clause (1) and clause (4) of the preceding paragraph
and the requirement in clause (2) of the preceding paragraph that
a record of the Rx number be retained. If these requirements are
satisfied, these debit card transactions will be considered fully
substantiated at the time and point-of-sale.

Health FSA and HRA debit cards may be used to purchase over-the-counter
medicines and drugs at “90 percent pharmacies” but only
as provided in Notice 2010-59.

For all other providers and merchants, other than those described
in this notice, health FSA and HRA debit cards may not be used to
purchase over-the-counter medicines or drugs after January 15, 2011.

III. EFFECTIVE DATE

This notice is effective for health FSA and HRA debit card purchases
of over-the-counter medicines or drugs made after January 15, 2011.

IV. EFFECT ON OTHER DOCUMENTS

This notice modifies Notice 2010-59, 2010-39 I.R.B. 396 (September
27, 2010) as it applies to the use of health FSA and HRA debit cards
to reimburse expenses for over-the-counter medicines or drugs. IRS
and Treasury intend to amend the regulations at § 1.125-6
to reflect the provisions of this notice. Taxpayers may rely on this
notice pending the issuance of the amended regulations.

DRAFTING INFORMATION

The principal author of this notice is Robin Ehrenberg of the
Office of Division Counsel/Associate Chief Counsel (Tax Exempt and
Government Entities). For further information regarding this notice,
contact Ms. Ehrenberg at (202) 622-6080 (not a toll-free call).

[1] Section 6001 requires taxpayers to maintain records and to substantiate
all positions and amounts reflected on returns. Rev. Proc. 98-25,
1998-1 C.B. 689, contains detailed rules for taxpayers with automated
systems (e.g., requiring IRS access to all electronic
records used to prepare returns, and that records must be in format
readable by IRS). Also, Prop. Treas. Reg. § 1.125-6 describes
the requirements for substantiating, paying and reimbursing expenses
for § 213(d) medical care when payment is made with a debit
card and incorporates previously issued guidance on the requirements.